While most Stock Gumshoe readers are here in the US or in Canada, there are loyal followers of the mighty Gumshoe all over the world — particularly in the English speaking parts, naturally, and I always get a bunch of questions about stocks teased by some of the British and Australian newsletters … so today, we’re taking a look at a teaser from The Bulford Files, which is Tom Bulford’s “upgrade” letter for folks who aren’t satisfied with the sexiness of the picks in his Red Hot Penny Shares. I’ve written about a few of his ideas in the past, though it’s been a couple years … so let’s jump in again, shall we?
Today’s tease is all about oil once again — this time, the scramble for oil in the Falkland Islands, a story we’ve heard before over the last couple years but which has heated up with some recent drilling results.
Here’s some more of the hype:
“A potentially COLOSSAL deposit of oil has been hidden beneath a tiny island in the South Atlantic for centuries…
“Now – thanks to a “breakthrough” oil strike – one small company could be on the verge of a blistering PRICE SURGE!
“Lock on to this shrewd little stock TODAY and it could make you £440,275 richer!
“That is not a misprint – this overlooked London-listed firm could eventually climb 17,611%! Give me a few minutes RIGHT NOW and I’ll tell you all about it…
“Invest in this little-known business NOW… because should everything go to plan – and the pumps get fired up – this share could shoot up higher and faster than anything you’ve ever seen!”
Of course, “should everything go to plan” I’d be cashing in my winning Powerball ticket this morning. Unfortunately, anyone can have a “plan.” So what’s behind this one that has Bulford so excited?
“But I’ll make no bones about it – you don’t have long to get in. You have to act quickly.Are you getting our free Daily Update
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“In just a few days, this company will be positioned to test-drill. And that could turn the ignition on a truly gigantic price climb.
“I’ll be frank – this small London-listed share is very close to erupting… in fact, just a few whispers on the internet or in the back pages of the FT can send oil stocks like this racing through the roof.
“The firm that started the oil frenzy, Rockhopper, has already leaped 167% in just 6 days! That was on the back of results from their test-drill.
“And the City are now scrambling like mad, trying to get in on the NEXT stock which could be about to explode…
“Luckily, I’ve been way ahead of the game on this one.”
OK, so he goes through quite a bit more, most of it focused on the fact that modern seismic surveys have made it feasible to target oil drilling offshore the Falklands (or Las Islas Malvinas, if you prefer), and that the estimates for oil in the region have consistently risen over the years, to what is now a total estimate of 60 billion barrels.
Then we get into more about this particular company:
“At this company’s May 2009 AGM analysts revealed that a find of half a billion barrels of oil could be worth £14 per share…
“…and a discovery of 3.5 billion barrels could be worth £100 per share.
“But remember, we’re not talking about half a million barrels, or even 3.5 billion barrels. We’re talking about as much as 60 billion barrels! …
“Plus you’ll get the full lowdown on why buying this share not only puts you in the running for some spectacular gains, but a unique way to considerably lower the risk usually linked with small exploration companies.”
OK, so that “lower the risk” bit caught my attention. I get promises of 20,000% profits every day … but lowering the risk is intriguing. More on that in a minute.
Here are a few more clues culled from the letter to help us narrow it down:
“on 3 June 2005 the Board announced its delight at the results of the seismic survey work…
“… a non-executive director snapped up 5000 shares on 10 February 2006…
“And on the 1st October 2008 the most significant development so far… a major industry giant agreed to partner the Falklands oil project and pay for the drilling to begin!”
OK, so just to warn you — I think most of those clues are off by a little bit, assuming I’m right about my solution (more on that in a moment).
But the real move is expected to come by next month, according to Bulford:
“You’ve got until 10th June to get in: This spectacular growth story has just hit its ‘trigger point’!
“This company is getting ready.
“Within a couple of weeks, their rig will be in place to start test drilling.
“And that news alone could send all the big City investors piling in, trying to get a head-start on the action.”
And then we get to the “lower the risk” part:
“When I first learned about the Falklands oil discovery, I was impressed with the oil potential. But what really excited me was learning that, even if the price of oil drops by 50% overnight, you could still make money.
“Sound weird? Let me explain…
“The truth is, the investment I’ve been telling you about isn’t another typical “oil play”… it’s something a lot sharper and a lot shrewder than that…
“It’s what I call a “hidden value” investment, because it has more than just a stake in the Falkland oil profits.
“In fact it’s a very profitable, 156-year-old established company and it owns 8.2% of an oil driller that could be about to make a BIG strike!
“Now consider the potential here…
“Remember, just off the East Falklands coast lies an estimated reserve of 60 billion barrels.
“How much is that worth? Well, even if oil drops more than half its current price… and sells for $35 a barrel… that still amounts to $2,100 billion of oil reserves – worth about £1,295bn.
“8.2% of that is worth £106bn… and the total value for this entire company on the stock market is currently less than £50m!
“Do you see why this company is a brilliant ‘hidden value’ share?”
OK, so who are we dealing with here?
Well, the nameplate company for these oil exploration parcels south and east of the Falklands is Falkland Oil and Gas Ltd (FOGL) — and I can verify that Bulford has been interested in their story for a while, we saw a very similar teaser way back in 2008 for one of his other letters, it even lifted much of the back-story language about the Falklands and the history of the potential oil there. I’d have to go back and re-check all that info to see if he was really teasing Falkland Oil and Gas back then, or if he was already interested in this alternative stock … that’s right, he’s not touting the actual oil company.
The reduced risk play he’s teasing is a conglomerate/holding company that’s been around for actually 159 years now, which tells me that he needs to update his teaser, and that he might have been teasing this holding company the first time around, too. This was a company started under royal charter to establish transport links and trading connections in the Falklands back in 1851 called the Falkland Islands Company. That company changed hands a few times, sold off some of its local assets, and eventually got spun off by another troubled company as Falkland Islands Holdings back in 1998, the name it still carries.
Falkland Islands Holdings has itself started and spun off a couple companies to capitalize on its mineral rights — they created a gold and mining explorer that has since been taken over by someone else and effectively disappeared without discovering or producing anything, as far as I can tell, and they also funded the spinoff of Falkland Oil and Gas, which then raised some more money and got a listing on the AIM in London. Falkland Islands Holdings now owns about 8.2% of FOGL, you can see their basic info here, and they also own a Portsmouth ferry company an art handling firm called Momart (their biggest business is handling traveling museum exhibitions), and what remains of the original Falkland Islands Company (they are still the dominant retailer on the island, and also run auto sales and service, shipping, insurance and travel services, and own still a significant chunk of land and some income-producing properties). Those three operating companies are all profitable, and the company focuses on maintaining that profitability and producing dividends for shareholders, with the shareholding in Falkland Oil and Gas seen as the significant possible growth driver for the future … actually, it’s not so much just FOGL that they’re hoping for as it is all of the Falklands oil explorers, the argument being that a big new oil industry sprouting from nothing in the Falklands will drive much higher sales for all of their local support and service businesses.
Falkland Islands Holdings has been actually selling down their FOGL holdings, in part to repay debt — they had about 16-18% of the company for a while, but have sold shares pretty consistently for a couple years, though they say they won’t be selling any more shares until drilling results are announced.
And yes, FOGL has partnered with a major oil company, BHP Billiton, to do the actual drilling — though that was actually in October 2007, not in 2008, and part of the reason that it’s moving through right now is that BHP has three years to drill two wells to exercise their rights. BHP is now the majority owner of the leases and the operator here, which is probably good news — FOGL itself has only seven employees and it looks like they exist mostly to manage their minority stake in the offshore parcels.
One major problem for these folks, and for others looking for oil in the Falklands, has been getting a rig — there are still precious few drillships and semisubmersible rigs that can drill without being anchored to the sea floor (meaning, they can handle the deeper water applications), and most of the offshore prospects for FOGL are deepwater fields. Thankfully for them, there is one field that they can drill with an available, BHP will be using the Ocean Guardian (owned by Diamond Offshore, can drill at 1,500 ft water depth), the same rig that’s drilling for both Desire Petroleum and Rockhopper, two other talked-about Falklands explorers, to drill the Torea prospect — their other prospects seem to need deeper-water rigs, so they’re probably hoping for a sublet of one of those rigs for a relatively short time since so many of them have been locked up by Brazil.
Falkland Islands Holdings trades primarily in London, at FKL — current price is 488 pence, and according to the interim report from last September the net asset value (some interpretation of book value, plus the value of the traded shares in FOGL) is 367 pence. The shares can also be bought on the pink sheets for US investors who don’t trade directly in London, though volume is very light (as always, if you’re trying to buy something on the pinks that trades primarily in London, place your order when both markets are open and bid slightly above the fair London price — that gives your broker a chance to buy when London is setting the price, effectively buying in London and selling to you). At 488 pence (GBP 4.88, for the math challenged) the fair price would be about $7.04. The last pink sheets buy went through at $7.25, a premium of 3%. And as I said they do pay a dividend and have tried in the past to keep raising the dividend, for 2009 they paid a total dividend of 8p, so the yield is just under 2% right now.
That’s not to say you should buy the shares, of course, as usual I’m just trying to share what details I can about the teased stock. If you prefer to buy the actual oil explorer, Falkland Oil and Gas, do note that the shares are up substantially in recent weeks, thanks at least in part to the continued progress of Desire and Rockhopper who are both a bit further along. Their main listing is FOGL in London, and the pink sheets symbol is FLKOF. This one actually last traded at a slight discount on the pinks, $2.67 versus a fair value in London of $2.71, which indicates to me that the last trade was probably a US investor trying hard to sell. Volume is very light, so as usual for the pink sheets foreign stocks buys are often made at a small premium, sells at a discount, you pay a price in share friction for buying on the pinks instead of having your broker buy direct for you, (or trading direct yourself in London if you have an IB, Fidelity or Etrade account that lets you do so).
So … excited about the new oil rush in the Falklands, and think that this diversified Falklands/art handling/Portsmouth ferry company is the way to profit with less risk? Or is it all just too much hype for an oil prospect that’s years away and may not materialize at all? Let us know with a comment below.